Question 1

Why would foreign participants borrow from U.S. financial markets?

Accepted Answer

A)  They look for the cheapest source of funds. 
B)  They look at the economic conditions of their home country. 
C)  All of these choices are correct. 
A)  They look for the cheapest source of funds. 
B)  They look at the economic conditions of their home country. 
C)  All of these choices are correct.

Question 2

Which of these money market instruments are short-term funds transferred between financial institutions, usually for no more than one day?

Accepted Answer

A)  treasury bills 
B)  federal funds 
C)  commercial paper 
D)  banker acceptances 
A)  treasury bills 
B)  federal funds 
C)  commercial paper 
D)  banker acceptances

Question 3

Which of the following factors cause the supply of funds curve to shift?

Accepted Answer

A)  total wealth 
B)  risk of the financial security 
C)  future spending needs 
D)  All of these choices are correct. 
A)  total wealth 
B)  risk of the financial security 
C)  future spending needs 
D)  All of these choices are correct.

Question 4

Suppose we observe the following rates: 1R1 = 8 percent, 1R2 = 10 percent, and E(2r1) = 8 percent. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2?

Accepted Answer

A)  1.02 percent 
B)  4.04 percent 
C)  6.15 percent 
D)  12.03 percent 
A)  1.02 percent 
B)  4.04 percent 
C)  6.15 percent 
D)  12.03 percent

Question 5

Which of the following is/are NOT a capital market security

Accepted Answer

A)  Corporate bonds 
B)  Banker's acceptances 
C)  Corporate stocks 
D)  State and local government bonds 
A)  Corporate bonds 
B)  Banker's acceptances 
C)  Corporate stocks 
D)  State and local government bonds

Question 6

All of the following special provisions benefit security holders EXCEPT

Accepted Answer

A)  tax-free status. 
B)  convertibility. 
C)  callability. 
D)  All of these choices are correct. 
A)  tax-free status. 
B)  convertibility. 
C)  callability. 
D)  All of these choices are correct.

Question 7

Which of the following theories argues that individual investors and financial institutions have specific maturity preferences, and to encourage buyers to hold securities with maturities other than their most preferred requires a higher interest rate?

Accepted Answer

A)  liquidity premium hypothesis 
B)  market segmentation theory 
C)  supply and demand theory 
D)  unbiased expectations theory 
A)  liquidity premium hypothesis 
B)  market segmentation theory 
C)  supply and demand theory 
D)  unbiased expectations theory

Question 8

One-year Treasury bills currently earn 5.50 percent. You expect that one year from now, one-year Treasury bill rates will increase to 5.75 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities?

Accepted Answer

A)  5.50 percent 
B)  5.625 percent 
C)  5.75 percent 
D)  11.25 percent 
A)  5.50 percent 
B)  5.625 percent 
C)  5.75 percent 
D)  11.25 percent

Question 9

All of the following are benefits that financial institutions provide to our economy EXCEPT

Accepted Answer

A)  increased liquidity. 
B)  increased monitoring. 
C)  increased dollar amount of funds flowing from suppliers to fund users. 
D)  increased price risk. 
A)  increased liquidity. 
B)  increased monitoring. 
C)  increased dollar amount of funds flowing from suppliers to fund users. 
D)  increased price risk.

Question 10

In the United States, which of these financial institutions arrange most primary market transactions for businesses?

Accepted Answer

A)  investment banks 
B)  asset transformer 
C)  direct transfer agents 
D)  over-the-counter agents 
A)  investment banks 
B)  asset transformer 
C)  direct transfer agents 
D)  over-the-counter agents

Question 11

One-year Treasury bills currently earn 3.15 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.65 percent and that two years from now, one-year Treasury bill rates will increase to 4.05 percent. If the unbiased expectations theory is correct, what should the current rate be on three-year Treasury securities?

Accepted Answer

A)  3.40 percent 
B)  3.62 percent 
C)  3.75 percent 
D)  3.85 percent 
A)  3.40 percent 
B)  3.62 percent 
C)  3.75 percent 
D)  3.85 percent

Question 12

Which of these is the interest rate that would exist on a default-free security if no inflation were expected?

Accepted Answer

A)  nominal interest rate 
B)  real interest rate 
C)  default premium 
D)  market premium 
A)  nominal interest rate 
B)  real interest rate 
C)  default premium 
D)  market premium

Question 13

A two-year Treasury security currently earns 5.13 percent. Over the next two years, the real interest rate is expected to be 2.15 percent per year and the inflation premium is expected to be 1.75 percent per year. Calculate the maturity risk premium on the two-year Treasury security.

Accepted Answer

A)  5.13 percent 
B)  3.38 percent 
C)  2.98 percent 
D)  1.23 percent 
A)  5.13 percent 
B)  3.38 percent 
C)  2.98 percent 
D)  1.23 percent

Question 14

You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that one-year T-bills are currently earning 3.50 percent. Your broker has determined the following information about economic activity and the corporation's bonds:
Real interest rate = 2.50 percent
Default risk premium = 1.75 percent
Liquidity risk premium = 0.70 percent
Maturity risk premium = 1.50 percent
What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds?

Accepted Answer

A)  1 percent and 1.49 percent, respectively 
B)  1 percent and 6.45 percent, respectively 
C)  1 percent and 7.45 percent, respectively 
D)  3.50 percent and 9.95 percent, respectively 
A)  1 percent and 1.49 percent, respectively 
B)  1 percent and 6.45 percent, respectively 
C)  1 percent and 7.45 percent, respectively 
D)  3.50 percent and 9.95 percent, respectively

Question 15

Assume that you observe the following rates on long-term bonds: U.S. Treasury bonds = 4.15 percent AAA Corporate bonds = 6.2 percent BBB
The main reason for the differences in the interest rates is:

Accepted Answer

A)  maturity risk premium 
B)  inflation premium 
C)  default risk premium 
D)  convertibility premium 
A)  maturity risk premium 
B)  inflation premium 
C)  default risk premium 
D)  convertibility premium

Question 16

A particular security's default risk premium is 3 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 4.2 percent. The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. The security has no special covenants. Calculate the security's equilibrium rate of return.

Accepted Answer

A)  8.50 percent 
B)  6.05 percent 
C)  10.25 percent 
D)  9.90 percent 
A)  8.50 percent 
B)  6.05 percent 
C)  10.25 percent 
D)  9.90 percent

Question 17

Which of the following statements is correct?

Accepted Answer

A)  According to the unbiased expectations theory, the return for holding a two-year bond to maturity is equal to the nominal rate divided by the real interest rate. 
B)  The rate on a 10-year Corporate bond can never be less than the rate on a 10-year Treasury. 
C)  We usually observe the inverted yield curve. 
D)  The rate on a three-year Treasury can never be less than the rate on a 15-year Treasury. 
A)  According to the unbiased expectations theory, the return for holding a two-year bond to maturity is equal to the nominal rate divided by the real interest rate. 
B)  The rate on a 10-year Corporate bond can never be less than the rate on a 10-year Treasury. 
C)  We usually observe the inverted yield curve. 
D)  The rate on a three-year Treasury can never be less than the rate on a 15-year Treasury.

Question 18

How is the shadow banking system the same as the traditional banking system?

Accepted Answer

A)  It intermediates the flow of funds between net savers and net borrowers. 
B)  It serves as a middle man. 
C)  The complete credit intermediation is performed through a series of steps involving many nonbank financial service firms. 
D)  The complete credit intermediation is performed by a single bank. 
A)  It intermediates the flow of funds between net savers and net borrowers. 
B)  It serves as a middle man. 
C)  The complete credit intermediation is performed through a series of steps involving many nonbank financial service firms. 
D)  The complete credit intermediation is performed by a single bank.

Question 19

When monetary policy objectives are to contract the economic growth, which of the following occurs?

Accepted Answer

A)  The Federal Reserve decreases the supply of funds available in the financial markets. 
B)  At every interest rate the supply of loanable funds increases. 
C)  The supply curve shifts down and to the right. 
D)  The equilibrium interest rate decreases. 
A)  The Federal Reserve decreases the supply of funds available in the financial markets. 
B)  At every interest rate the supply of loanable funds increases. 
C)  The supply curve shifts down and to the right. 
D)  The equilibrium interest rate decreases.

Question 20

All of the following are factors that influence interest rates for individual securities EXCEPT

Accepted Answer

A)  the security's term to maturity. 
B)  inflation. 
C)  special provisions regarding the use of funds raised by a particular security issuer. 
D)  the home mortgage rate. 
A)  the security's term to maturity. 
B)  inflation. 
C)  special provisions regarding the use of funds raised by a particular security issuer. 
D)  the home mortgage rate.

Why would foreign participants borrow from U.S. financial markets?

Which of these money market instruments are short-term funds transferred between financial institutions, usually for no more than one day?

Which of the following factors cause the supply of funds curve to shift?

Suppose we observe the following rates: ₁R₁ = 8 percent, ₁R₂ = 10 percent, and E(₂r₁) = 8 percent. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L₂?

Which of the following is/are NOT a capital market security

All of the following special provisions benefit security holders EXCEPT

Which of the following theories argues that individual investors and financial institutions have specific maturity preferences, and to encourage buyers to hold securities with maturities other than their most preferred requires a higher interest rate?

One-year Treasury bills currently earn 5.50 percent. You expect that one year from now, one-year Treasury bill rates will increase to 5.75 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities?

All of the following are benefits that financial institutions provide to our economy EXCEPT

In the United States, which of these financial institutions arrange most primary market transactions for businesses?

Which of these is the interest rate that would exist on a default-free security if no inflation were expected?

A two-year Treasury security currently earns 5.13 percent. Over the next two years, the real interest rate is expected to be 2.15 percent per year and the inflation premium is expected to be 1.75 percent per year. Calculate the maturity risk premium on the two-year Treasury security.

Assume that you observe the following rates on long-term bonds: U.S. Treasury bonds = 4.15 percent AAA Corporate bonds = 6.2 percent BBB The main reason for the differences in the interest rates is:

Which of the following statements is correct?

How is the shadow banking system the same as the traditional banking system?

When monetary policy objectives are to contract the economic growth, which of the following occurs?

All of the following are factors that influence interest rates for individual securities EXCEPT

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

Exam 6: Understanding Financial Markets and Institutions

Why would foreign participants borrow from U.S. financial markets?

Which of these money market instruments are short-term funds transferred between financial institutions, usually for no more than one day?

Which of the following factors cause the supply of funds curve to shift?

Suppose we observe the following rates: 1R1 = 8 percent, 1R2 = 10 percent, and E(2r1) = 8 percent. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2?

Which of the following is/are NOT a capital market security

All of the following special provisions benefit security holders EXCEPT

Which of the following theories argues that individual investors and financial institutions have specific maturity preferences, and to encourage buyers to hold securities with maturities other than their most preferred requires a higher interest rate?

One-year Treasury bills currently earn 5.50 percent. You expect that one year from now, one-year Treasury bill rates will increase to 5.75 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities?

All of the following are benefits that financial institutions provide to our economy EXCEPT

In the United States, which of these financial institutions arrange most primary market transactions for businesses?

Which of these is the interest rate that would exist on a default-free security if no inflation were expected?

A two-year Treasury security currently earns 5.13 percent. Over the next two years, the real interest rate is expected to be 2.15 percent per year and the inflation premium is expected to be 1.75 percent per year. Calculate the maturity risk premium on the two-year Treasury security.

Assume that you observe the following rates on long-term bonds: U.S. Treasury bonds = 4.15 percent AAA Corporate bonds = 6.2 percent BBB The main reason for the differences in the interest rates is:

Which of the following statements is correct?

How is the shadow banking system the same as the traditional banking system?

When monetary policy objectives are to contract the economic growth, which of the following occurs?

All of the following are factors that influence interest rates for individual securities EXCEPT

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

Suppose we observe the following rates: ₁R₁ = 8 percent, ₁R₂ = 10 percent, and E(₂r₁) = 8 percent. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L₂?